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January 2012 Archive for Know Your Market

RSS By: Dairy Today: Know Your Market, Dairy Today

Dairy trading experts offer strategies and practical perspectives to optimize market performance.

The Antidote for Uncertainty

Jan 30, 2012

Although dairy’s fundamentals point to volatility and uncertainty in 2012, don’t procrastinate in your marketing program. Focus instead on consistency to build your best average price.

 
WDE D10106a DoorninkBy Liz Doornink, Stewart-Peterson
 
Liz Doornink is a new contributor to Dairy eUpdate. Liz takes the place of former blogger Steven Schalla, who has decided to pursue a career opportunity with his family’s dairy farm in Wisconsin. Liz brings her experience as a former dairy farm owner to her new career with Stewart-Peterson Inc.
 
There is much talk about the “three-year milk cycle” and whether the most recent milk price downturns indicate that we’re heading into the downturn that history would suggest is due. The bottom line is that from where we sit, uncertainty is the only sure thing.
 
Let’s look at the mixed bag of fundamentals:
 
  • Milk production -- December milk production increased by 2.5% year-over-year. That is the fastest year-over-year growth in milk production since November 2010. For all of 2011, milk production grew at an average pace of 1.8%. That is the second slowest annual rate of growth since 2005.
 
  • Cow numbers -- For 2011, a total of 80,000 cows were added to the U.S. herd. Of those, 67,000 were added in the first half of the year and only 13,000 in the last half of the year.
 
·         The December Livestock Slaughter report showed 262,000 head removed from the herd. This is the second consecutive month that slaughter numbers have increased after bottoming out in October. This amounts to a 3.6% increase month-over-month but a 1.1% decrease year-over-year. This is the first time since July that monthly slaughter has lagged behind last year’s numbers.
 
  • The December Cold Storage Report showed total cheese stocks up from November, a seasonal rebound. Total cheese stocks for December were estimated at 981.317 million pounds, up 1.3% from the previous month but down 6.4% from the previous year. This is the second consecutive month total cheese stocks have fallen 5% or more year-over-year. And, this is the first time since July that stocks have increased on a month-to-month basis.
 
·         Exports – November was the third best export month of 2011. Year-over-year exports increased by 10.4% compared to last November.
o   Total cheese exports increased 18.80% versus the previous month and 52.4% versus last year.
o   Total butter exports increased 37.30% versus last month but were down 10.60% versus last year.
o   Whey exports increased 15.20% versus last month and 10.70% versus last year.
 
So, the total export picture for 2012 is mixed. Domestic prices at a discount, coupled with international prices at a premium, lend support to prices. A higher trending U.S. dollar is a negative when paired with uncertain global demand.
 
  • Grain prices still being historically high lends support to the milk market, but if grains lose footing, support would falter.
 
If you’d like to see the charts depicting all these fundamentals, check out the “Dairy Today Market Week in Review.”  http://www.agweb.com/livestock/dairy/multimedia/dairy-market-week-in-review/.
 
All of this points to volatility and uncertainty for 2012.
 
What to do?
 
Uncertainty often leads to procrastination. Yet when we look at how we manage our operations as a whole, most dairymen operate by the philosophy of continually moving ahead and making incremental improvements.
 
When it comes to marketing, consistency is what we’re discussing with our clients right now.
  • Keep capturing value when it is offered.
  • Set downside stops that will act as triggers to take action.
  • Then be disciplined to act on those stops.
 
Consistency is the antidote to uncertainty. We strive for consistency in the other aspects of our business, and marketing is no different. When we look at what really improves our bottom line, it is consistency that builds the best possible weighted average price over time. (We have data from the last seven years, the most volatile in milk prices history, which shows this.)
 
If you’re afraid of making a mistake, you’re not alone. I’m talking with many producers right now who are procrastinating with marketing. I got into this business because I believe that marketing made a difference for my own dairy operation. And now I’m glad to be a part of Dairy Today’s “Know Your Market” blog so I can share my experiences and listen to your questions.
 
Please feel free to contact me with your questions, and I’ll write about them next time.
 
Liz Doornink is in Dairy Business Development for Stewart-Peterson, Inc. Liz can be reached by calling 800.334.9779 or at ldoornink@stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing.  Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2012 Stewart-Peterson Inc. All rights reserved.

Feed Insights for Dairies for 2012

Jan 23, 2012

A closer look for dairy producers at the role of DDGs, corn, wheat and weather in the coming year.

 
ron mortensen photo 11 05   CopyBy Ron Mortensen, Dairy Gross Margin, LLC
 
DDGs Change
 
Many ethanol plants are starting to extract corn oil before grinding corn for ethanol production. This makes the DDGs lower in fat and more acceptable for swine and poultry feed. Therefore, inclusion rates for swine and poultry feed can increase. USDA reports inclusion rates for swine now moving to 30%. The change in DDGs by these plants means inclusion rates moving towards 50%.  This higher inclusion reduces the need for both soybean meal and corn by these segments of the feed industry. 
 
In addition, DDG exports have been on a downward path ever since China accused the U.S. of dumping. Therefore, for two reasons, there are more DDGs available domestically. The recent USDA reports have had trouble communicating how this ethanol byproduct is getting put back in the feeding system. There are shifts going on, and it is hard to get data to understand the changes.
 
Given reductions in meal demand, Cargill announced the Des Moines, Iowa soybean processing plant will close. They will stop crushing soybeans but still take deliveries, shipping them to other Cargill crush plants. Crush industry officials indicate that most plants have been grinding for oil. This is another indication of the excess crush capacity in the industry in the U.S.  
 
Corn
 
USDA’s Jan. 12, 2012 report puts some light on the feeding rates. Better quality corn has improved feeding conversions and reduced use. Warmer temperatures may have also been helpful to reduce feeding rates. The latest Feed Outlook from USDA indicated grain consuming animal units are projected to be up 0.7% from last year. The grain only (no meal, DDGs, etc.) feed rate per animal unit is estimated to be down 1.5% in 2012 to the lowest level ever.
 
Higher quality corn has improved ethanol plant grinding conversions. However, USDA may still need to increase ethanol grind in the supply/demand tables. Ethanol grind was huge for the first four months of the marketing year in an attempt to capture the last of the tax credits.  Now, in order to get to USDA’s 5-billion-bushel use for ethanol, the grind will need to be reduced by 10% immediately (versus December). If immediate reductions in weekly production do not occur, look for the USDA to raise this category of corn use.   
 
Wheat
 
World wheat production has rebounded after the Russian drought. Increased wheat supplies and prices similar to corn have given wheat feeding a boost worldwide. This has reduced U.S. corn exports.  
 
The U.S. soft wheat industry has a storage system developed by the CME that allows for excess returns to store wheat. Commercial entities can buy wheat, receive the storage payments and hedge it in future months for big guaranteed returns. This is holding some wheat off the market that could be feed. The Southeast feeders (hogs and poultry) apparently have imported wheat for feeding and this could continue. 
 
Weather
 
The last few weeks have been all about Argentine weather. Argentina is having a drought at least equal to 2009 when corn and soybean production were reduced significantly. In 2009, it stayed dry until June and reduced wheat plantings in Argentina. This drought could impact world feed prices because Argentina is the world’s second largest corn exporter. The weather in the U.S. is too wet in the East and too dry in the West. Planting conditions and late summer weather will have a big impact on corn yields. 
 
If you need to manage feed risk, look at a variety of option strategies. Contact your broker or feed supplier to see if you can use one of many option strategies to be long feed but benefit if it does move lower later in the summer.
 
Ron Mortensen is one of the founders of Dairy Gross Margin, LLC, which was formed in 2006 to sell Livestock Gross Margin Insurance to dairy producers. Mortensen’s firm is now licensed in 23 states. He is also president of Advantage Agricultural Strategies, Ltd., which he founded in 1985, to provide individual risk management advice for farmers and agribusiness using futures, options and cash trading strategies. Contact him at 515-570-5265 or ron@advantageag.com.

What’s the Biggest Mistake First-Time Hedgers Make?

Jan 13, 2012

Frustration might set in when you miss out on higher milk prices. Don’t forget why you were hedging in the first place.

Katie Krupa photoBy Katie Krupa, Rice Dairy
The saying goes, "Those who cannot remember the past are condemned to repeat it," and unfortunately that statement rings true for many. The dairy industry has experienced its fair share of turbulence over the last several years. I am often asked, if the will volatility continue. While I don’t know what the future will bring, I advise that dairymen plan for continued volatility.
For many dairymen, 2011 was the first year they utilized risk management strategies. And most of these newcomers ended up leaving some money on the table because the milk price climbed higher than their hedged price. While milk prices moving higher is a good thing, many dairymen end up frustrated when the milk price moves higher than their hedged price. Unfortunately, their frustration often causes them to stop using risk management on their operation.
Sadly, I have seen this pattern occur several times in the past. Dairymen begin hedging, milk prices move higher, they stop hedging, and the milk price moves lower. In 2004, many dairymen started hedging their milk for the first time because the milk price was at an all-time high, and they were locking in profits. But many of those dairymen ended up unsatisfied with their decision because the milk price continued to climb. So ultimately they missed out on some upside opportunity.
Krupa Class III price 1 12
Their dissatisfaction with hedging resulted in the discontinuation of risk management for their business. This meant they were not hedged when the milk price moved lower in subsequent years. So, for those who hedged in 2004, they were not hedged in 2005. For those who hedged in 2008, they were not hedged in 2009. So will this pattern repeat itself? 
Just this week I was talking to a dairyman who hedged a portion of his milk for 2011 and missed out on some of the higher prices. While this gentleman was not upset with his decision (he protected profits), his business partner was not happy and vowed never to hedge again. When I hear those types of statements, I cringe for several reasons.
Firstly, I know the dairyman wasn’t fully aware of why they were hedging in the first place. Dairymen should be hedging to protect their profits, not beat the market. Secondly, I am worried that if the price does significantly decline, this dairy, like so many others, will not be hedged and may not survive the next downturn.
Many dairymen and industry leaders believe the milk price will significantly decline in the near future. I don’t know what the future will bring, and truly no one does. Don’t get caught up in price projections, because price projections are not guarantees. Historically, the most significant changes experienced in the milk price have not been predicted -- most notably the crash of 2009. In the summer of 2008 many economists were actually saying the milk price would move higher and approach or even exceed $25 per hundredweight. Unfortunately that projection did not come to fruition.
It is important to understand the past, evaluate decisions (both the good and bad ones), learn and move forward. It is always best to evaluate your past experiences in a rational state of mind, which is often easier said than done, especially when we are dealing with money. By evaluating the past you are better able to manage your future decisions.
Risk management is a difficult and stressful topic for most dairymen. As always, I suggest working with a team that includes both farm managers and industry professionals to help aide you in the decision making process. Make your decisions based on what is best for the financials of your farm, try to avoid fear and greed, and remind yourself that if your business is making money, that is a good thing!  
Katie Krupa is the Director of Producer Services with Chicago-based Rice Dairy, a boutique brokerage firm offering guidance, analysis, and execution services on futures, options, spot and forward markets. If you are interested in learning more, Katie offers monthly webinars on the basics of risk management. You can reach Katie at klk@ricedairy.com.Visitwww.ricedairy.com.

The Best Broad-Based Milk Marketing Strategy

Jan 09, 2012

Yes, there is one, Babler says. It involves studying USDA’s announced price for milk over a long continuum and using option-based minimum price strategies.

Carl BablerBy Carl Babler, First Capitol Ag
An often asked question of a dairy broker is, “What is the best strategy for managing milk price?”
Those inquiring minds are hoping to get a jump forward on their progression along the marketing experience curve by simply skipping all of the “not so good” methods and approaches to minimizing milk price risk. They hope to avoid strategies that cost too much, are ineffective, may result in excessive margin obligation and, in some way, limit their opportunity for higher milk prices. 
Are they asking for too much? No. Are they in dreamland hoping for the impossible? No.  Is there a broad-based best strategy for managing milk price? Yes!
To define a “best fit strategy” for marketing milk, we must first examine the milk market and determine if there is a unique consistent market character observed. Analyzing the milk market can be an overwhelming task if you focus on all fundamental factors impacting milk price and price change. Such a  study, if continued long enough, can result in “analysis paralysis,” meaning after an exhaustive study one may be unable to derive a true, single, consistent driving force that one could track that would drive one’s best milk marketing strategy. 
Instead, I have found it more prudent to shift away from all the factors that move price for one reason or another and look more closely at milk price itself. To simplify further, it is best to just study the USDA announced price for milk over a long continuum. Viewing USDA’s announced milk price for pattern and character may help us determine which marketing strategy is not a good fit.
I present the chart below showing the price distribution for all announced Class III milk prices since 1980.
Babler chart 1 12
We can observe the frequency that certain prices have been announced. When applying a curve to the data, the character of the price distribution is revealed. The curve is not a normal bell-shaped curve, but rather a curve with a “long tail to the right,” “skewed to the right” or “skewed to higher prices.” The apparent quick take-away is that price is below $14.30 nearly 80% of the time, with the balance of announced prices  (20%) spread over many price levels all the way up to $21.67.
Practical: It is the character of the milk market to make exaggerated moves to higher prices when abnormality comes to the market. It has been common for producers to oppose the curve and lock in or fix a price to mitigate downward price risk and then miss out on a higher price opportunity as the market is set off by some surprise.
Bottom-line: This price distribution curve for milk is to the producer’s advantage, if dairymen apply a minimum price strategy. The use of straight put options, buying calls to cover sold futures or fixed price cash contracts or using min/max strategies are all the best fit for milk’s price distribution profile. With this in mind, one must always consider strategies that allow for higher prices if they come as they chose pricing and hedge strategies. Thus, the best broad-based strategy is to use option-based minimum price strategies that manage the risk of lower prices yet allow dairy producers an opportunity for higher prices if they are presented.  
Carl B. Babler is a consultant and senior hedge specialist with First Capitol Ag in Galena, Ill. He has been involved in the futures industry as a broker, educator and hedger since 1975. Babler holds master’s degree from the University of Wisconsin-Platteville and completed agribusiness course work at Harvard University. You can reach him at 1-800-884-8290 or cbabler@firstcapitolag.com.

What Every Market Adviser Wants Clients to Understand

Jan 02, 2012

I have a great opportunity to return to our family dairy farm. I intend to seek much advice for my new career. In turn, I’d like to leave you with some straightforward advice about marketing.

 
Copy of S Schulla Bio PictureBy Steven Schalla, Stewart-Peterson
 
It is with mixed emotions that I share with you my departure from Dairy Today’s team of Know Your Market contributors to return to the family dairy farm full time. This decision was given much consideration, and I sincerely thank the Dairy Today staff for the opportunity to contribute to such a dynamite publication. 
 
So now, with the start of the New Year and new opportunities for me, I can offer one last column of advice – advice that I will be taking home to the farm with me. When I look back on my years as a market adviser, I consider the points I offer below to be the "hard facts" about marketing that producers struggle to grasp. At first, these thoughts may come across as a bit brash; however, my experience is that long-term risk managers and, moreover, successful dairies understand and follow these principles.
 
In this, my final column, I have the opportunity to tell it like it is, so here goes:
 
·                     There is no such thing as a free lunch. Producers always seem to be searching for a mythical position that protects their break-even or desired margin, and also leaves 100% ability to gain better prices, and costs little to nothing to maintain that position. Of course, this position doesn’t exist. Government programs are funded by taxes, and in the private sector, fellow participants at the CME will appropriately demand compensation for taking on your risk. The simple fact is that you cannot have it all. The more certainty you desire, the more opportunity you will have to surrender. 
 
·                     Becoming a fully versed marketer takes education and has become more advanced. Learning the available tools and how they work through the CME or government agencies is a time and energy investment, and results in critical skills you will have for the rest of your career. At a minimum, find a trusted adviser and have confidence in the strategies they share. Like everything on the farm, marketing has evolved, even over the past 10 years. Thus, expect to use more advanced strategies that can involve (yes, the dreaded) margin calls to see more attractive upfront premium costs and better final results.
 
·                     The bottom line is the bottom line. It is easy to retrospectively get caught up in analyzing individual trades as winners or losers, and whether you really needed to spend money on premiums for a position or on margin insurance. Citing a specific trade or position can be misleading, so analyze results using a weighted average approach to find the cumulative effect of all decisions made. In the end, every decision is a means to an end—that being the financial success of your operation. Cumulatively, if your hedging decisions allow you to meet the goals set out for your operation, whatever they are, your marketing efforts have been successful. Note: Avoid evaluating your success in marketing after an emotional price swing (up or down). Instead, this is the time to remember the next point:
 
·                     In marketing, consistency is king. A decision to engage in marketing needs to be at minimum a three- to five-year commitment to see the full cycle of prices. Pound into your head that as a hedger, when prices go up, you will be behind the market price, and that is OK if you remain consistent. Stick to the same type of approach (aggressive or conservative) in an up market and in a down market for best results. For example, if you have used an aggressive forward contracting approach, stay with it, even after prices have gone up, to catch the opposite result as prices come back down. If you are inconsistent in your marketing, you are simply attempting to cherry-pick the right times to be in or out of the market. Which leads to the final point:
 
·                     We operate in a global market, and nobody knows for sure what’s next. More than ever before, there are scores of dynamic factors that affect the price on your milk check. The best analysts may be able to guess the correct general trend of prices. However, consistently projecting specific tops and bottoms in the market is impossible. Thus, we recommend having a dynamic plan ready for both extremes—one that protects from the lowest prices and allows you opportunity to capture higher prices. If you are prepared for the market moves, it is much easier to execute positions during those emotional price swings. In addition, it is easy to assume that what’s happening in your backyard is the situation everywhere. From New Zealand milk production to the European debt crisis, keep an eye on the high-level fundamentals and current events around the world. Then strategize for any number of outcomes.
 
I’m a firm believer that if you want to be successful at something, find those who are the best and learn what they are doing. I will be doing this as I become a dairy producer myself. With regard to marketing, I know that the most successful dairies embrace the marketing principles I describe here, because I have witnessed it. I will be following their example. 
 
I am excited to announce that my friend and colleague, Liz Doornink, will take my place as a regular contributor to the Know Your Market blog. Liz specializes in working with producers who are interested in price opportunity and risk management yet are unsure where to start, or have concerns about how it actually works. Because she has this unique viewpoint, I’m eager to read her fresh perspective about the top-of-mind concerns of dairy producers. Stay tuned for her first post in February!
 
Thanks again for reading. Happy New Year, and may this be your most successful year yet! 
 
Steven Schalla has been a market adviser for Stewart-Peterson, Inc. The firm can be reached by calling 800.334.9779 or visiting www.stewart-peterson.com.
 
The data contained herein is believed to be drawn from reliable sources but cannot be guaranteed. Neither the information presented, nor any opinions expressed constitute a solicitation of the purchase or sale of any commodity. Those individuals acting on this information are responsible for their own actions. Commodity trading may not be suitable for all recipients of this report. Futures trading involves risk of loss and should be carefully considered before investing. Past performance may not be indicative of future results. Any reproduction, republication or other use of the information and thoughts expressed herein, without the express written permission of Stewart-Peterson Inc., is strictly prohibited. Copyright 2011 Stewart-Peterson Inc. All rights reserved.
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